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Tax Scams and Stock Bubbles

This tax bill is designed to create the appearance of a booming economy, but appearances can be deceiving.

A year since Republicans unexpectedly seized power and they’ve finally managed to pass a major piece of legislation. After repeatedly face planting while attempting to repeal Obama care, they have passed a tax bill which guts the tax rate for corporations and top earners, reduces the deductions normal people can take, and generally shifts the tax burden even further away from the wealthy. There’s also a longer term political calculus: in addition to purposefully fucking over democratic constituencies, the deficits this bill will create will be used to justify cuts to the social safety net down the line. Trump and Republican leaders will however gloat about how good this tax cut will be for the economy, and Corporate America will be complicit in these shenanigans. They will surely point to the stock market as proof.

The stock market is often used to gauge the strength of the economy. To the extent that stock prices reflect levels of profitability and productivity you could do worse. However, this isn’t always the case. Tax cuts can’t really increase the productivity of firms, only how the revenue they generate is divided. Changing how a pie is sliced does not necessarily make that pie bigger. In a context in which wages remain stagnant in real terms, bosses have little incentive to plow their savings into labor saving technology that could increase productivity. Instead they head to the casino.

The reality is that the stock market is likely to grow as a result of this tax cut, but not because the companies these stocks represent have become more productive. Rather companies and rich people who have more cash on hand will plow some of that into the stock market. Indeed several major companies have announced plans for stock buybacks, thus increasing demand for stocks while reducing the supply. Thus the increase we see in stock prices is largely a reflection of inflation, not actual increases in the actual value firms generate and certainly not the overall well being of “The Economy” ™.

I believe the smarter Republican policy people know this on some level, but again it’s part of a political calculus. In an election year likely to be brutal for Republicans, the stock market will be one thing they can point to in their defense. It’s intellectually dishonest to do so, but few would accuse the Republican party of being honest. Even fewer would accuse Trump of being an intellectual.

There are however real problems with inflating stock prices solely for the sake of it. The only people that benefit are people who already own stock. Given how concentrated stock ownership is, in absolute terms the benefit will also be tightly concentrated. But as stock prices rise, it increases the barriers for profitable investment, which in turn reduces the profit rate. Since economic activity only happens under capitalism to the extent it is profitable this is likely to speed up the tendency towards crisis.

Because this increase in the stock market will basically be a function of rich people having more money, and not an increase in productivity, there is a real potential for creating and exacerbating speculative bubbles. Just because more money is pouring into the market does not mean there is a corresponding increase in profitable investment opportunities for that money. Solid stocks will see their prices rise until it no longer makes sense to buy them. Money will then be directed toward more questionable stocks. Whether investors believe such stocks are actually good investments or just assume they’ll be able to sell for more than they bought before the house of cards collapses is immaterial. Most people will not benefit from an increase in stock prices but many will be impacted when these bubbles burst.

Capitalism is a system in which economic activity only occurs for the sake of profit making, not the satisfaction of human needs and desires. When the ability of firms to make a profit declines, it won’t be long until economic activity in general nosedives as well. As the economy heats up, competition between firms to precure labor and other inputs (raw materials, real estate, etc) drives costs up while competition for market share places limits to how much firms can increase prices. These dynamics tend toward a crisis of profitability. Individual firms and government agencies will attempt measures to counter or cover up this declining profitability, but eventually reality asserts itself; payments are missed, triggering a series of defaults and rounds of deflationary sell-offs as people scrounge up what money they can to stay solvent. As prices drop so to does production since by the time goods and services reach the market their price will be lower than the cost it required to make them. Unemployment spikes as production slows. The boom carried with it the seeds of the crisis, but the crisis also carries the seed of the next boom. Assets made cheap by the crisis can be profitably scooped up by capitalists fortunate enough to have weathered the storm (tending toward increased concentration of wealth). Unemployment depresses wages which means production can be resumed at a lower cost, and thus more profitably for capitalists. The business cycle begins again.

The tax cuts can’t alter this dynamic. At most it can shift it on the margins; the crisis occurs sooner or later, it is deeper or more shallow. But it is only one of an endless number of variables, and far from the most important.

Ironically this attempt to juke the stats to make the economy look good is reminiscent of the Soviet Union. Bureaucrats would routinely say the enterprises they were in charge of surpassed mandated targets of quality and quantity in order to make themselves look stable, perhaps avoiding a purge in the process. This made effective planning impossible since central planners were working with faulty information. Lying about the number of tractors you produced is an admittedly less sophisticated version of what Republicans are doing with this tax cut, but the principle is the same: manipulating statistics to make yourself look good and in the process exacerbating systemic dysfunction.

Ultimately the rise in stock prices represents the illusion of an increase in wealth. It is little more than a cynical PR stunt which at best will delay and at worst exacerbate the inevitable crisis. Crisis is an inevitable feature of capitalism and measures such as quantitative easing or tax cuts can only really obscure the underlying dynamics. They will alter the timing or severity of crisis or recovery only on the margins. The best economic policy can’t deliver society from the boom and bust cycle because that cycle is the result of the internal logic of capitalism, not “correct” or “incorrect” economic policy. The periodic economic crises, and the human suffering they cause, will only be transcended when the working class over throws capitalism and the state that buttresses it, replacing it with a system designed to meet human needs and desires. But a system which operates only to profit private property owners will lead to recurrent economic and ecological catastrophes.